The transfer of immovable property by land owners under mechanism of Joint development Agreement (‘JDA’) has evolved as a preferred mode of transacting, especially in urban areas where the land owners do not have the time or expertise to develop the land and market the property on their own. They, therefore, enter into an arrangement for mutual benefit with a developer for developing and marketing the land parcels to various buyers.
Such agreements for joint development are generally entered into either under the Area Sharing Method or the Revenue Sharing Method, the more common form being the Area Sharing Method where agreements are executed to develop the land owned by the land owners. The developer gets a share in the land (‘UDS’) and in consideration for ceding the UDS, the landowner gets a share in the super built up area.
This article attempts to analyse the provisions of Section 45(5A) of the Income-tax Act, 1961 (‘IT Act’) in the context of applicability of the said provision in a scenario where the JDA entered into is unregistered.
Position prior to insertion of Section 45(5A)
Taxability of JDA under the IT Act has always been a debatable point. Where the land owners hold the land as a capital asset, the same is taxable under the head capital gains. The charge for capital gains contained in Section 45 provides for taxability of transaction of transfer of capital asset in the year in which the transfer takes place. Therefore, determination of taxability of land owners under a JDA depends on the point of transfer of capital asset.
The expression ‘transfer’ is defined in Section 2(47) of the IT Act. The provisions of clause (v) and (vi) to Section 2(47) of the IT Act[1] accord a wide meaning to the expression ‘transfer’, bringing within its ambit even to include those transactions which would have otherwise not been considered as ‘transfer’ under the general law. These clauses cover the following transactions:
a. any transaction allowing possession of any immovable property to be taken or retained in part performance of a contract under Section 53A of Transfer of Property Act [Section 2(47)(v)]
b. any transaction which has the effect of transferring or enabling enjoyment of any immovable property [Section 2(47)(vi)]
The law regarding the point of transfer under JDA has evolved through a catena of judgements[2], where judicial fora have held that there is a ‘transfer’ by the land owner to the extent of the developer’s share in the land, on the date of entering the JDA itself and that capital gains is triggered in the hands of the landowner at that point in time.
The Bombay High Court in the case of Charturbuj Dwarakadas Kapadia[3] held that the ‘transfer’ as far as the landowner is concerned takes place on the date of entering into the JDA on the ground that possession given to a developer would also fall within the ambit of the ‘transfer’ under Section 53A of the Transfer of Property Act, 1882 read with Section 2(47)(v) of the IT Act.
This legal position that transfer happens on the date of entering into the JDA itself, necessitated the land owners to discharge tax liability even in the absence of receipt of any consideration in their hands, thereby causing grave hardship to them.
The above method of taxability of capital gains was posing challenges to many land owners who were constrained to discharge tax liability even before completion of project and receipt of consideration.
Taxability of unregistered JDAs
Although the position of law, as has been laid down by different Courts fixed the point of transfer in a JDA to the date of the agreement itself, the Supreme Court in the case of Balbir Singh[4] held that the provisions of Section 2(47)(v) and (vi) will not apply in cases where the JDA is not registered. The Court held that ‘transfer of land through an unregistered document by giving possession of the property for limited purpose of development would not amount to transfer and hence Capital gains would not arise.’
As regards application of Section 2(47)(v) on execution of JDA, it was held by the Supreme Court that ‘registration is a sine qua non for a contract to come within the purview of Section 53A of ToPA and in the absence of such registration, the provision of Section 2(47)(v) of the IT Act would not be attracted.’
For Section 2(47)(vi) to be attracted, the Supreme Court held that the expression ‘enabling the enjoyment of’ would take colour from the previous word ‘transfer’ and hence, where possession is granted for a specific purpose with ownership rights retained, the same would not amount to transfer under Section 2(47)(vi).
Introduction of Section 45(5A) of the IT Act
As already pointed out in this article, taxing the land owner at the stage of entering into the JDA itself was causing undue financial hardship to them. With a view to alleviate the hardship, an amendment was brought in by the Finance Act, 2017 by inserting a new sub-Section (5A) to Section 45 w.e.f. 1 April 2018. The new provision states that capital gains would arise in the hands of the landowner once the completion certificate is issued by the authority on completion of the project or part of the project, as the case may be. The salient features of the new section are summed up as follows:
- Applicable to Individuals/HUF
- Applicable only when capital asset held by the assessee is in the form of land/building
- Applicable only when ‘specified agreement’ is registered
- Not applicable when land owner transfers share of land before issuance of completion certificate
Whether provisions of Section 45(5A) would apply to JDA entered prior to 1 April 2017?
An interesting question is whether the provisions of the newly inserted section be applicable to agreements entered prior to the section being made effective? The explanation given in the memorandum to the Finance Act, 2017 for insertion of the new sub section states as follows:
‘With a view to minimise the genuine hardship which the owner of land may face in paying capital gains tax in the year of transfer, it is proposed to insert a new sub-section (5A) in section 45 so as to provide that in case of an assessee being individual or Hindu undivided family, who enters into a specified agreement for development of a project, the capital gains shall be chargeable to income-tax as income of the previous year in which the certificate of completion for the whole or part of the project is issued by the competent authority.’
The explanation seems to give a view that the sub-section (5A) to Section 45 has been introduced as a beneficial provision with an intent to mitigate the hardships faced by landowners.
However, the ITAT Hyderabad in the case of K. Vijayalakshmi[5] has held that the provisions of Section 45(5A) cannot be applied retrospectively as they are substantive provisions.
It will therefore be interesting to see how the aforesaid decision is unfolded by the higher judicial fora.
Applicability of Section 45(5A) to unregistered JDAs
The new sub-section has many essential conditions one of which is that the ‘specified agreement’ should be a registered document. Specified agreement is defined to be one ‘whereby the land owner confers right on the Developer to develop the land or building in consideration for a share in the land or building so developed’.
For the purpose of this section, the right to develop the land is done by way of a JDA, hence the same shall be construed as the specified agreement.
Considering the specific condition stipulated in the section for the JDA to be registered, the provisions of the new section cannot be made applicable to unregistered JDAs.
As previously discussed, the position regarding taxability of unregistered JDA has been clarified by the Supreme Court in case of Balbir Singh. Therefore, one may contend that even if JDA is unregistered, the capital gains liability will not be triggered as on the date of agreement as has been the position of law in all cases prior to insertion of Section 45(5A). However, this would raise another question as to what would be the point of taxability in case of unregistered JDAs.
Interestingly, the ITAT Chennai, in the case of Tamil Nadu Brick Industries[6] has held that ‘when a General power of Attorney is executed by the owner in favour of the developer granting all rights in favour of the property, then the same would amount to transfer under Section 2(47)(v) of the Act and that Capital gains will get triggered in the year of execution of the GPA.’
The ratio that can be culled out from the aforesaid case is that JDA and GPA must be read together and, in a situation, where JDA is unregistered, but GPA is registered, the same would amount to transfer within the definition of Section 2(47) of the IT Act. Thus, capital gains liability would get triggered in the year in which GPA is executed.
Determination of consideration where execution of GPA is construed as transfer
In cases where JDAs entered are under the area-sharing method, the landowners get a share of the super built up structure as consideration. In that case, at the time of execution of GPA, the landowner would not have received any consideration as buildings/flats would not have been constructed and handed over. In such a situation, a question may arise as to how capital gains are to be determined in the hands of the landowner?
It is at this point in time that one should refer to the provisions of Section 50D of the IT Act. The section provides that where the consideration received or receivable from a transaction cannot be determined, then the fair market value of asset transferred shall be determined to be the full value of consideration.
Various courts applying the provisions of Section 50D have held that the ‘fair market value of the land transferred shall be considered as the full value of consideration and construction cost of the super structure cannot be taken as the basis for computing capital gains’[7]
Conclusion
The intent of the legislature in inserting sub-section (5A) to Section 45 of the IT Act to mitigate the hardships faced by the landowners is highly commendable. The new provision also provides vast scope for interpretation as one dissects its application. One may expect interesting jurisprudence to evolve from various judicial fora on application and interpretation of the provision.
[The author is a Senior Associate in Direct Tax practice at Lakshmikumaran & Sridharan Attorneys, Chennai]
[1] Inserted by the Finance Act, 1987, w.e.f. 1 April 1988.
[2] CIT v. Ramgopal [2015] 55 taxmann.com 536 (Del); CIT v. Tata Teleservices Ltd [1980] 122 ITR 594; Vinoj Kumar Jain [2012] 395.
[3] Charturbuj Dwarakadas Kapadia v. CIT (2003) 260 ITR 491 (Bom).
[4] CIT v. Balbir Singh Maini (2017) 398 ITR 531 (SC).
[5] K Vijaya Lakshmi v. ACIT [TS-5722-ITAT-2018(Hyderabad)].
[6] Tamil Nadu Brick Industries v. ITO (2018) 97 taxmann.com 1 (Tri-Chennai).
[7] Vivekanand Padegal v. ACIT (ITA 923/Bang/2018); ACIT v. Shankar Vittal Motor Co. (ITA No.35/Bang/2015).
